A recent report on the Vietnamese banking industry by JP Morgan’s Asia-Pacific Securities Research Department gave in-depth assessments on the business performance of six Vietnamese banks, including Vietnam Technological and Commercial Joint-Stock Bank (Techcombank), Asia Commercial Joint Stock Bank (ACB), Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank), Military Commercial Joint Stock Bank (MB), Vietnam Prosperity Joint-Stock Commercial Bank (VPBank) and Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank).
Regarding Vietnam Prosperity Joint Stock Commercial Bank (VPB), according to JP Morgan, the ownership of Fe Credit which was the consumer finance company with the largest market share in Vietnam was the main factor driving the net interest margin ratio (NIM) of VPBank to the high level compared to the industry average number of 9.6%. Consumer loans accounted for 57 percent of the bank’s total debit balance and brought VPBank core competitive advantage.
According to JP Morgan, the State Bank of Vietnam (SBV) recently considered a maximum limit of cash loans at 30 percent of total loans, and also limited the conditions for new cash borrowers when there was only a loan secured in the banking system. These proposals were in the draft form but would create significant risks for investment in banks, as Fe Credit had a proportion of cash loans of 71%.
Fe Credit accounted for 55 percent of the consumer finance lending market by 2017. The average NIM had reached 29 percent in the past three years. More than 71 percent of FE Credit’s loans were cash or personal loans, which yielded nearly 50%, according to JP Morgan calculations. FE Credit accounted for 24 percent of the loan value but contributed over 50 percent of VPBank’s operating income. That was the main motive for the four-year average return on equity (ROE), reaching 24%.
The draft regulations of SBV could lead to challenges for FE Credit and VPBank’s operations. If implemented, FE Credit would not be able to expand new loans in cash, as the limit could not exceed 30 percent of the loan portfolio. Cash loans with terms of less than one year could not be extended and would be removed from the bank’s portfolio. VPBank would need to compensate by increasing secured consumer loans at FE Credit.
JP Morgan estimated that cash loans in the debit balance structure would increase from 25 percent from 2020 through 2021 to 28%.
That race would lead to a decline of 110 basis points in annual asset yield by 2020 and 2021, yearly reduction in NIM to over 80 basis points, and ROE to 15 percent to 16 percent from 20%. That also put pressure on stocks before growing again after 2021.
The circular of SBV was still in draft form, but it might affect the stock market, in the view of JP Morgan. In addition to regulation, there were price risks included the expectation of higher consumer loan growth and market improvement II, and hazards of falling prices included increased competition for cash loans and deterioration of asset quality.
